Pan-Asia Catalysts/Events, Quiddity Advisors

David Blennerhassett

Pan-Asia Catalysts/Events

Quiddity Advisors

Event-Driven

After submitting a confidential, non-binding, indicative all-scrip merger proposal to <a href="https://www.smartkarma.com/entities/oil-search-ltd" target="_blank" data-smartkarma-citation="entities:773:1" rel="noopener">Oil Search Ltd (OSH AU)</a>'s board on the 25 June, <a href="https://www.smartkarma.com/entities/santos-ltd" target="_blank" data-smartkarma-citation="entities:711:1" rel="noopener">Santos Ltd (STO AU)</a> <a href="https://cdn-api.markitdigital.com/apiman-gateway/ASX/asx-research/1.0/file/2924-02402372-2A1313090?access_token=83ff96335c2d45a094df02a206a39ff4" target="_blank" rel="noopener">bumped</a> the scrip consideration on the 2 August by 6.5% to 0.6275 new Santos shares for every OSH share.  This would give OSH's shareholders 38.5% of the merger group. The implied transaction price of A$4.52/share  - if using Santos price on the 24 June - is a 19.7% premium to the undisturbed price.  The OSH board recommended the Offer in the absence of superior proposal, and due diligence was afforded.
This morning, Santos and OSH <a href="https://cdn-api.markitdigital.com/apiman-gateway/ASX/asx-research/1.0/file/2924-02420086-2A1322734?access_token=83ff96335c2d45a094df02a206a39ff4" target="_blank" rel="noopener">entered into</a> a definitive agreement to merge the two companies in an all-scrip transaction. The scrip ratio remains unchanged. 
The OSH board has unanimously recommended shareholders vote in favour of the merger in the absence of a superior proposal.
The merger would create a major regional player with a pro-forma market cap of ~A$21bn. Santos expects the merger to unlock pre-tax synergies of US$90-115mn per annum.
The merger is subject to OSH shareholder approval, regulatory approvals, and Papua New Guinea (PNG) court approval.
It's that last approval that could prove to be a sticking point.  
Santos has a 13.5% interest in PNG LNG, behind <a href="https://www.smartkarma.com/entities/exxon-mobil-corp" target="_blank" data-smartkarma-citation="entities:811:1" rel="noopener">Exxon Mobil (XOM US)</a>'s 33.2% and OSH's 29%. OSH also holds a 22.8% interest in Papua LNG, a brownfield LNG growth opportunity.
In a recently completed <a href="https://www.coiubsl.com/" target="_blank" rel="noopener">royal commission</a> involving complex UBS loans, the bank maintained the fees it charged the PNG government to borrow $1.2bn in 2014 to purchase a 10.1% stake in OSH were appropriate. The PNG government was compelled to <a href="https://www.reuters.com/article/papua-oil-search-idUSL4N1M23EF" target="_blank" rel="noopener">sell</a> that stake in 2017 when OSH's shares fell and it did not have the necessary funds to put up extra capital for the loan. Contrary to PNG's former PM comments that it made A$39mn on the deal, the commission heard PNG lost US$432mn. 
In <a href="https://skr.ma/epYxh" target="_blank" rel="noopener">Santos/Oil Search: Getting Facts Straight</a>, I wondered if this less-than-satisfactory situation might resurface in any government approval process for a Santos/OSH merger.
In various media articles, Deputy Prime Minister Samuel Basil said this week:
<blockquote>
If the merger will result in the weakening of any Papua New Guinean shareholders or shareholder interests, reduction in market liquidity, potential for job losses, potential delisting from PNGX, and loss of local ownership of the company assets to a foreign interest, it is not in PNG’s national interest.
</blockquote>
Such a statement raises the stakes after PNG's PM James Marapoe's earlier <a href="https://www.pmnec.gov.pg/index.php/secretariats/pm-media-statements/336-pm-marape-says-government-is-closely-monitoring-a-proposed-acquisition-of-oil-search-limited" target="_blank" rel="noopener">comments</a> back in August that:
<blockquote>
Oil Search Limited is a prominent PNG company whose activities comprise a significant percentage of PNG’s GDP and provides the livelihood to thousands of Papua New Guineans both directly and indirectly. Any proposed merger must satisfy the national interest test.
</blockquote>
OSH (incorporated in PNG) is listed in both Australia and PNG, however, Santos is only listed in Australia. OSH has around 5,000 PNG shareholders according to Basil.
Should the merger complete, and OSH is delisted - taking with it almost one-third of PNG's market cap - domestic shareholders will have no option but to acquire and trade their shares in Australia, an activity compounded by foreign exchange restrictions. Unless Santos plans to list the merged entity in PNG. 
Basil continues:
<blockquote>
The Board of Oil Search and Santos must explicitly inform Papua New Guinea their plans for PNG capital market development in the context of this merger. Our concern derives from the possibility that PNG will incur significant detriment in the oil and gas sector to a foreign company. It is equal to losing our sovereignty in the oil and gas industry where PNG will have no control over it.
</blockquote>
Put another way: should PNG investment funds re-domicile in Australia, PNG local investors will be cut off from investing (via Santos and OSH) in PNG's large PNG projects.
More below the fold.

After submitting a confidential, non-binding, indicative all-scrip merger proposal to Oil Search Ltd (OSH AU)'s board on the 25 June, Santos Ltd (STO AU) bumped the scrip consideration on the 2 August by 6.5% to 0.6275 new Santos shares for every OSH share.  This would give OSH's shareholders 38.5% of the merger group. The implied transaction price of A$4.52/share  - if using Santos price on the 24 June - is a 19.7% premium to the undisturbed price.  The OSH board recommended the Offer in the absence of superior proposal, and due diligence was afforded.
This morning, Santos and OSH entered into a definitive agreement to merge the two companies in an all-scrip transaction. The scrip ratio remains unchanged. 
The OSH board has unanimously recommended shareholders vote in favour of the merger in the absence of a superior proposal.
The merger would create a major regional player with a pro-forma market cap of ~A$21bn. Santos expects the merger to unlock pre-tax synergies of US$90-115mn per annum.
The merger is subject to OSH shareholder approval, regulatory approvals, and Papua New Guinea (PNG) court approval.
It's that last approval that could prove to be a sticking point.  
Santos has a 13.5% interest in PNG LNG, behind Exxon Mobil (XOM US)'s 33.2% and OSH's 29%. OSH also holds a 22.8% interest in Papua LNG, a brownfield LNG growth opportunity.
In a recently completed royal commission involving complex UBS loans, the bank maintained the fees it charged the PNG government to borrow $1.2bn in 2014 to purchase a 10.1% stake in OSH were appropriate. The PNG government was compelled to sell that stake in 2017 when OSH's shares fell and it did not have the necessary funds to put up extra capital for the loan. Contrary to PNG's former PM comments that it made A$39mn on the deal, the commission heard PNG lost US$432mn. 
In Santos/Oil Search: Getting Facts Straight, I wondered if this less-than-satisfactory situation might resurface in any government approval process for a Santos/OSH merger.
In various media articles, Deputy Prime Minister Samuel Basil said this week:

If the merger will result in the weakening of any Papua New Guinean shareholders or shareholder interests, reduction in market liquidity, potential for job losses, potential delisting from PNGX, and loss of local ownership of the company assets to a foreign interest, it is not in PNG’s national interest.

Such a statement raises the stakes after PNG's PM James Marapoe's earlier comments back in August that:

Oil Search Limited is a prominent PNG company whose activities comprise a significant percentage of PNG’s GDP and provides the livelihood to thousands of Papua New Guineans both directly and indirectly. Any proposed merger must satisfy the national interest test.

OSH (incorporated in PNG) is listed in both Australia and PNG, however, Santos is only listed in Australia. OSH has around 5,000 PNG shareholders according to Basil.
Should the merger complete, and OSH is delisted - taking with it almost one-third of PNG's market cap - domestic shareholders will have no option but to acquire and trade their shares in Australia, an activity compounded by foreign exchange restrictions. Unless Santos plans to list the merged entity in PNG. 
Basil continues:

The Board of Oil Search and Santos must explicitly inform Papua New Guinea their plans for PNG capital market development in the context of this merger. Our concern derives from the possibility that PNG will incur significant detriment in the oil and gas sector to a foreign company. It is equal to losing our sovereignty in the oil and gas industry where PNG will have no control over it.

Put another way: should PNG investment funds re-domicile in Australia, PNG local investors will be cut off from investing (via Santos and OSH) in PNG's large PNG projects.
More below the fold.

Oil Search/Santos: PNG a Potential Party Pooper

Smartkarma Research Team, Smartkarma

Smartkarma Research

Smartkarma Research Team

Smartkarma

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For our next Smartkarma Webinar, we are thrilled to welcome back Insight Provider <a href="https://www.smartkarma.com/profiles/kyle-rudden" target="_blank" data-smartkarma-citation="accounts:4495" rel="noopener">Kyle Rudden</a>, who continues his series on ESG investing.On this session, Kyle will give an overview of the “Metrics and Materiality” issue and debate, explore its implications for Corporate ESG Reporting and ESG Investing, and examine Metrics and Materiality in practice through examples and case studies.This webinar is organised jointly by Smartkarma and SGX.<h3>The webinar will be hosted on Wednesday, 25 August 2021, 17:00 SGT/HKT.</h3><div class="content-highlight"><h2><a href="https://share.hsforms.com/1H9pFZOB-RF2J00kbvMmxcw2c5gj?zoom_webinar_id=88191048159" target="_blank" rel="noopener">Register for the Webinar here</a></h2></div>Kyle Rudden is an ESG (Environmental, Social, Governance) analyst with an alpha-centric approach to ESG research. After all, ESG investing is, first and foremost, investing. "Alpha-centric" does not mean apathetic, however. Quite the contrary. Kyle believes global sustainability – i.e., environmental stewardship, social equality, and economic prosperity – is imperative, and private-sector capital is its cornerstone. Private-sector capital still has fiduciary responsibilities. Profitability is necessary for sustained impact. The Triple Bottom Line. People, Planet, AND Profit.

For our next Smartkarma Webinar, we are thrilled to welcome back Insight Provider Kyle Rudden, who continues his series on ESG investing.On this session, Kyle will give an overview of the “Metrics and Materiality” issue and debate, explore its implications for Corporate ESG Reporting and ESG Investing, and examine Metrics and Materiality in practice through examples and case studies.This webinar is organised jointly by Smartkarma and SGX.The webinar will be hosted on Wednesday, 25 August 2021, 17:00 SGT/HKT.Register for the Webinar hereKyle Rudden is an ESG (Environmental, Social, Governance) analyst with an alpha-centric approach to ESG research. After all, ESG investing is, first and foremost, investing. "Alpha-centric" does not mean apathetic, however. Quite the contrary. Kyle believes global sustainability – i.e., environmental stewardship, social equality, and economic prosperity – is imperative, and private-sector capital is its cornerstone. Private-sector capital still has fiduciary responsibilities. Profitability is necessary for sustained impact. The Triple Bottom Line. People, Planet, AND Profit.

Smartkarma Webinar | ESG Metrics and Materiality - What Matters to Whom and Why

Travis Lundy

<a href="https://www.smartkarma.com/entities/bhp-group-ltd" target="_blank" data-smartkarma-citation="entities:147:1" rel="noopener">BHP Group (BHP AU)</a> has been reasonably widely thought to be interested in selling its global oil &amp; gas assets business as CEO Mike Henry looks to "future-facing" commodities businesses. Over the weekend, it came out that BHP global O&amp;G head Geraldine Slattery <a href="https://www.theaustralian.com.au/business/mining-energy/bhps-geraldine-slattery-arrival-sparks-woodside-deal-talk/news-story/d654f29deab29380c23abb6ca2ce261a" target="_blank" rel="noopener">had flown to Perth</a>, where <a href="https://www.smartkarma.com/entities/woodside-petroleum-ltd" target="_blank" data-smartkarma-citation="entities:177:1" rel="noopener">Woodside Petroleum (WPL AU)</a> is headquartered. Australian Financial Review's Street Talk column on Sunday confirmed that <a href="https://www.smartkarma.com/entities/woodside-petroleum-ltd" target="_blank" data-smartkarma-citation="entities:177:1" rel="noopener">Woodside Petroleum (WPL AU)</a> and <a href="https://www.smartkarma.com/entities/bhp-group-ltd" target="_blank" data-smartkarma-citation="entities:147:1" rel="noopener">BHP Group (BHP AU)</a> were in talks to do a deal on BHP's oil and gas assets whereby Woodside would issue BHP $20bn of shares in return for the assets, and then BHP would distribute most of the shares to shareholders so as to make sure it did not turn into a change-of-control transaction. There simply is no way this would be done as a cash transaction.I note that Woodside itself is looking for a permanent CEO after longtime CEO Peter Coleman exited in June. Meg O’Neill in charge of Woodside’s development and marketing arm, is acting CEO. Getting a new CEO in the process of buying assets to make it bigger - especially increasing its presence in the Scarborough project and in the Gulf of Mexico, might be just the ticket. The discussion being mooted suggests a change of control situation might be or have been in the offing. Based on revenues and operating profits that may be reasonable. Based on total assets, it would suggest a strong premium for BHP's producing and development assets. BHP reports earnings on Tuesday after market close, and Woodside reports pre-open on Wednesday.BHP has been distributing proceeds of its shrinkage to its investors for the last while. One should not expect that to change. What "price" BHP "gets" in such a deal is almost irrelevant - A$18bn? A$20bn? A$18bn? If they get an extra A$1bn it will be a nice cherry on top for the owners of A$250bn market cap company but there are questions about upfront vs ongoing liability and one does not know if they would retain a 15-20% stake, as is apparently being <a href="https://www.theaustralian.com.au/business/mining-energy/bhps-geraldine-slattery-arrival-sparks-woodside-deal-talk/news-story/d654f29deab29380c23abb6ca2ce261a" target="_blank" rel="noopener">mooted</a>.However, the deal structure itself creates some interesting issues which will mean some very big changes.More below.

BHP Group (BHP AU) has been reasonably widely thought to be interested in selling its global oil &amp; gas assets business as CEO Mike Henry looks to "future-facing" commodities businesses. Over the weekend, it came out that BHP global O&amp;G head Geraldine Slattery had flown to Perth, where Woodside Petroleum (WPL AU) is headquartered. Australian Financial Review's Street Talk column on Sunday confirmed that Woodside Petroleum (WPL AU) and BHP Group (BHP AU) were in talks to do a deal on BHP's oil and gas assets whereby Woodside would issue BHP $20bn of shares in return for the assets, and then BHP would distribute most of the shares to shareholders so as to make sure it did not turn into a change-of-control transaction. There simply is no way this would be done as a cash transaction.I note that Woodside itself is looking for a permanent CEO after longtime CEO Peter Coleman exited in June. Meg O’Neill in charge of Woodside’s development and marketing arm, is acting CEO. Getting a new CEO in the process of buying assets to make it bigger - especially increasing its presence in the Scarborough project and in the Gulf of Mexico, might be just the ticket. The discussion being mooted suggests a change of control situation might be or have been in the offing. Based on revenues and operating profits that may be reasonable. Based on total assets, it would suggest a strong premium for BHP's producing and development assets. BHP reports earnings on Tuesday after market close, and Woodside reports pre-open on Wednesday.BHP has been distributing proceeds of its shrinkage to its investors for the last while. One should not expect that to change. What "price" BHP "gets" in such a deal is almost irrelevant - A$18bn? A$20bn? A$18bn? If they get an extra A$1bn it will be a nice cherry on top for the owners of A$250bn market cap company but there are questions about upfront vs ongoing liability and one does not know if they would retain a 15-20% stake, as is apparently being mooted.However, the deal structure itself creates some interesting issues which will mean some very big changes.More below.

If Woodside Buys BHP Petroleum for Scrip, There Will Be Flowback

<div>
Despite a momentary memory lapse from <a href="https://www.smartkarma.com/entities/oil-search-ltd" target="_blank" data-smartkarma-citation="entities:773:1" rel="noopener">Oil Search Ltd (OSH AU)</a>, <a href="https://www.smartkarma.com/entities/santos-ltd" target="_blank" data-smartkarma-citation="entities:711:1" rel="noopener">Santos Ltd (STO AU)</a> <a target="_blank">confirmed</a> on the 20 July it had submitted a confidential, non-binding, indicative all-scrip merger proposal to Oil Search's board on the 25 June.
</div>
<div>
Santos proposed Oil Search shareholders receive 0.589 new Santos shares for each Oil Search share held, resulting in Oil Search shareholders holding 37% of the merged group and Santos shareholders 63%. The implied transaction price, to be implemented via a Scheme, was A$4.25 per Oil Search share - based on Santos’ closing price on 24 June 2021 - or a 12.3% premium to Oil Search's closing price on the same day.
</div>
<div>
Oil Search considered the terms were not fair but <a href="https://cdn-api.markitdigital.com/apiman-gateway/ASX/asx-research/1.0/file/2924-02397158-2A1310798?access_token=83ff96335c2d45a094df02a206a39ff4" target="_blank" rel="noopener">agreed</a> there was strategic logic combining with Santos. 
In <a href="https://skr.ma/epYxh" target="_blank" rel="noopener">Santos/Oil Search: Getting Facts Straight</a>, I recommended buying Oil Search, with a view towards an improved ratio upwards of ~0.66x, or ~25% premium to last close using both share prices as 24 June. 
This morning Santos <a href="https://cdn-api.markitdigital.com/apiman-gateway/ASX/asx-research/1.0/file/2924-02402372-2A1313090?access_token=83ff96335c2d45a094df02a206a39ff4" target="_blank" rel="noopener">bumped</a> the consideration by 6.5% to 0.6275 new Santos shares for every Oil Search share.  This would give Oil Search's shareholders 38.5% of the merger group. The implied transaction price of A$4.52/share  - if using Santos price on the 24 June - is a 19.7% premium to the undisturbed price. 
The Oil Search board recommends the Offer in the absence of superior proposal. Due diligence has been afforded.
More below the fold.
</div>
<div>

</div>


Despite a momentary memory lapse from Oil Search Ltd (OSH AU), Santos Ltd (STO AU) confirmed on the 20 July it had submitted a confidential, non-binding, indicative all-scrip merger proposal to Oil Search's board on the 25 June.


Santos proposed Oil Search shareholders receive 0.589 new Santos shares for each Oil Search share held, resulting in Oil Search shareholders holding 37% of the merged group and Santos shareholders 63%. The implied transaction price, to be implemented via a Scheme, was A$4.25 per Oil Search share - based on Santos’ closing price on 24 June 2021 - or a 12.3% premium to Oil Search's closing price on the same day.


Oil Search considered the terms were not fair but agreed there was strategic logic combining with Santos. 
In Santos/Oil Search: Getting Facts Straight, I recommended buying Oil Search, with a view towards an improved ratio upwards of ~0.66x, or ~25% premium to last close using both share prices as 24 June. 
This morning Santos bumped the consideration by 6.5% to 0.6275 new Santos shares for every Oil Search share.  This would give Oil Search's shareholders 38.5% of the merger group. The implied transaction price of A$4.52/share  - if using Santos price on the 24 June - is a 19.7% premium to the undisturbed price. 
The Oil Search board recommends the Offer in the absence of superior proposal. Due diligence has been afforded.
More below the fold.





When questioned by analysts at an investor briefing on the 19 July as to any takeover offers, <a href="https://www.smartkarma.com/entities/oil-search-ltd" target="_blank" data-smartkarma-citation="entities:773:1" rel="noopener">Oil Search Ltd (OSH AU)</a>'s chairman Rick Lee denied it had received a change-of control approach.
That wasn't entirely incorrect. It wasn't even close. 
The day after that briefing, <a href="https://www.smartkarma.com/entities/santos-ltd" target="_blank" data-smartkarma-citation="entities:711:1" rel="noopener">Santos Ltd (STO AU)</a> <a href="file:///D:/Quiddity/Oil%20search/2924-02396991_NPS-2A1310715.pdf" target="_blank" rel="noopener">confirmed</a> that on 25 June 2021 it had submitted a confidential, non-binding, indicative all-scrip merger proposal to Oil Search's board.
The proposal, to be implemented through a Scheme, would result in Oil Search shareholders receiving 0.589 new Santos shares for each Oil Search share held. Upon completion, Oil Search shareholders would own 37% of the merged group and Santos shareholders 63%.
The implied transaction price was A$4.25 per Oil Search share, based on Santos’ closing price on 24 June 2021, or a 12.3% premium to Oil Search's closing price on the same day.
Oil Search <a href="https://cdn-api.markitdigital.com/apiman-gateway/ASX/asx-research/1.0/file/2924-02397158-2A1310798?access_token=83ff96335c2d45a094df02a206a39ff4" target="_blank" rel="noopener">agreed</a> there was strategic logic combining with Santos, but that the terms of the combo were "demonstrably not" fair. 
In addition, Oil Search's MD Kerian Wulff <a href="file:///D:/Quiddity/Oil%20search/2924-02396558-2A1310512.pdf" target="_blank" rel="noopener">resigned</a> for health reasons and that:
<blockquote>
following the receipt of recent concerns and complaints about his (Wulff's) behaviour .... the Board considered that Dr Wulff had behaved in a manner inconsistent with the standards expected by the Board in relation to his management style.
</blockquote>
Lots more below the fold.

When questioned by analysts at an investor briefing on the 19 July as to any takeover offers, Oil Search Ltd (OSH AU)'s chairman Rick Lee denied it had received a change-of control approach.
That wasn't entirely incorrect. It wasn't even close. 
The day after that briefing, Santos Ltd (STO AU) confirmed that on 25 June 2021 it had submitted a confidential, non-binding, indicative all-scrip merger proposal to Oil Search's board.
The proposal, to be implemented through a Scheme, would result in Oil Search shareholders receiving 0.589 new Santos shares for each Oil Search share held. Upon completion, Oil Search shareholders would own 37% of the merged group and Santos shareholders 63%.
The implied transaction price was A$4.25 per Oil Search share, based on Santos’ closing price on 24 June 2021, or a 12.3% premium to Oil Search's closing price on the same day.
Oil Search agreed there was strategic logic combining with Santos, but that the terms of the combo were "demonstrably not" fair. 
In addition, Oil Search's MD Kerian Wulff resigned for health reasons and that:

following the receipt of recent concerns and complaints about his (Wulff's) behaviour .... the Board considered that Dr Wulff had behaved in a manner inconsistent with the standards expected by the Board in relation to his management style.

Lots more below the fold.

Santos/Oil Search: Getting Facts Straight

United States

Exxon Mobil Corporation operates petroleum and petrochemicals businesses on a worldwide basis.  The Company's operations include exploration and production of oil and gas, electric power generation, and coal and minerals operations. Exxon Mobil also manufactures and markets fuels, lubricants, and chemicals.

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Oil Search/Santos: PNG a Potential Party Pooper

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If Woodside Buys BHP Petroleum for Scrip, There Will Be Flowback

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Santos and Oil Search Agree on Terms

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Santos/Oil Search: Getting Facts Straight

I would expect Oil Search to engage at ~0.66x, or ~25% premium to last close using both share prices as 24 June. I'd be buying here. I would expect...

David Blennerhassett

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